Good day, ladies and gentlemen, and welcome to the 8x8 Incorporated first quarter 2016 earnings conference call. [Operator Instructions] I would now like to turn the conference over to Joan Citelli, Director of Investor Relations. You may begin.

Thank you, and welcome everyone to our call. Today, I am joined by 8x8's Chief Executive Officer, Vik Verma; and our Chief Financial Officer, Mary Ellen Genovese, to discuss our results for 8x8's first fiscal quarter of 2016 ended June 30, 2015. If you have not yet seen today's financial results, the press release is available on the Investors tab of 8x8's website at www.8x8.com. Following our comments, there will be an opportunity for questions. Before I turn the call over to Vik, I would like to remind all participants that during this conference call any forward-looking statements are made pursuant to the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995. Expressions of future goals, including financial guidance and similar expressions, including without limitations, expressions using the terminology may, will, believe, expect, plans, anticipates, predicts, forecasts and expressions which reflect something other than historical fact are intended to identify forward-looking statements. These forward-looking statements involve a number of risks and uncertainties, including factors discussed in the Risk Factor sections of our Annual Report on Form 10-K, in our quarterly reports on Form 10-Q and in our other SEC filings and company releases. Our actual results may differ materially from any forward-looking statements due to such risks and uncertainties. The company undertakes no obligation to revise or update any forward-looking statements in order to reflect events or circumstances that may arise after this conference call, except as required by law. Thank you. And with that, I'll turn the call over to Vik Verma, Chief Executive Officer of 8x8.

Thank you, Joan, and welcome everyone to 8x8's first quarter of fiscal 2016 earnings call. I'll begin with a high-level summary of 8x8's performance during the quarter and our view of the current market, and then turn the call over to our CFO, Mary Ellen Genovese, who will cover the financial results in greater detail. 8x8 began fiscal 2016 with a very busy and productive first quarter, highlighted by the completion of two acquisitions and the posting of record-setting new monthly recurring revenue. 8x8's result for the first quarter of fiscal 2016 surpassed both revenue and net income expectations and were driven by a continued growth in the mid-market, increased traction of our channel partners and expanding international presence. Our total revenue for the first quarter of fiscal 2016, including a one-time accelerated payment of $1.2 million for a virtual desktop infrastructure technology license agreement, was $47.9 million, an increase of 26% year-over-year. Without this one-time revenue gain, our service revenue increased 25% year-over-year to $43 million. Our non-GAAP net income was also strong at $4.5 million or 9% of revenue, making it the 21 consecutive quarter in which 8x8 has generated non-GAAP net income alongside increasing revenue. All of our sales teams performed exceptionally well during the quarter. Our mid-market and channel teams continue to bring in large deals with five of the top-10 customers added during the quarter, requesting initial deployments in the 500 to 1,000 seat range. Also, the pipeline of some very large customer opportunities in the 1,000 to 10,000-plus seat range is starting to look interesting, as a few of these opportunities have moved into small trial deployments. The SMB team continued to make good progress, selling to customers in the 50 to 250 seat range. And in the U.K., we are seeing more and…

Thank you, Vik. As Vik noted, financial results for our first quarter of fiscal 2016 were strong with a 26% year-over-year increase in total revenue. Service revenue grew 29% year-over-year to $44.2 million. This included a one-time revenue gain from the accelerated payments on a VDI license agreements and one month of revenue from DXI, which as you know we've recently acquired. Excluding the aforementioned one-time revenue gain, 8x8 service revenue in the first quarter grew 25% year-over-year to $43 million. Additionally, our service revenue from mid-market customers increased 40% year-over-year, and now represents 45% of the company's total service revenue compared with 43% in the previous quarter. As a result of the accelerated payment on the VDI license agreement, you should remove approximately $286,000 of quarterly service revenue, beginning in the second fiscal quarter. GAAP gross margin was 73% compared with 71% in the same period a year ago. Service margin was 81%, an increase of 100 basis points from the year-ago quarter. Without the benefit of the accelerated payment, our non-GAAP net income was strong at $3.7 million or $0.04 per share. This represents 8% of revenue compared to $3 million or $0.03 per share, also represent an 8% of revenue in the same period a year ago. Average revenue per customer, excluding the one-time revenue gain across our entire customer base, was $353. This is up $33 sequentially and a 20% increase compared with the same period a year ago. Monthly business service revenue churn was 1% compared with 0.4% in the same period a year ago. Although, this rate will fluctuate from quarter-to-quarter, a 1% average monthly gross revenue churn rate is the best rate to use in your models. As a reminder, 8x8 calculates gross churn that is we do not include add-on MRR or…

Thank you, Mary Ellen. As you can see, we are off to a great start this fiscal year. And I'm more excited than ever about the multiple market opportunities that exist worldwide for a differentiated unified communication and contact center solution. With that, we'll be happy to take on any questions you may have for us today. Operator, please open the line for any questions.

[Operator Instructions] Our first question comes from the line of Amir Rozwadowski of Barclays.

I wanted to ask you a couple of questions. On the sales cycle side, I mean it seems as though you folks are certainly gaining increasing traction with the SMB community. I was wondering if you could talk to us a bit more about sort of how we should think about the sales cycle and the opportunity set, more specifically the pace of the opportunity set. It seems like you've got a number of factors working in your favor, specifically sort of the increased adoption of cloud services. But then if we start to think about large organizations, typically there is a little bit more eyes to dot and boxes to check before going with larger installments. We'd love to hear about sort of how we should think about the sales cycle, as you migrate the business?

Amir, I don't know if you picked up on this, but new monthly recurring revenue sold in the first quarter of 2016 to mid-market customers and by our channel sales team increased 38% year-over-year. The interesting thing, and I think I have mentioned that in my prepared remarks, says, we've been making the migration from SMB to mid-market and we're starting to see very good traction as you know in the mid-market. The interesting thing is we are starting to see enterprise customers, and they are happening faster than I thought. An enterprise customer, we're classifying as somebody with greater than 2,500 seats or more. And we're starting to see more and more of those. And the thing that is interesting is they are not coming in and saying, we just want a division, they are typically coming in, and saying, we're looking at moving to the cloud. More often than not, they'll do some kind of proof-of-concept or something like that. So the sales cycle is typically the same six months, I think that we have previously alluded to. And that's what the amount of time it takes and that includes a proof-of-concept. And once they do a proof-of-concept, which tends to be one location or five locations or 10 locations often global locations, they tend to go, all right, we're going to do a deployment across the entire corporation. As you know that's not been the case with the cloud before. What's typically happened is you'll have large corporation say, well, we have this one branch office that nobody really cares about, we'll go cloud there, but everything else is on premise. We're now noticing that these larger corporations are not just taking cloud as, yes, whatever we'll just do it as an aside, they are taking it as strategic and core. They're moving as you would guess very cautiously. They put you through the ringer. They want to test out your technology. They want to test out your deployment methodology. What they want to test out, your call quality. They want to test out your reliability et cetera, et cetera and they have an army of people that do some of this testing, but when they do move, it's the entire corporation not just one part of it.

Thinking about sort of the demand trajectory for those types of customers and then forgive me for misspeaking on the SMB versus mid-market side on the question. But as you can traction on the mid-market and increase around the enterprise side, could we see sort of an acceleration of adoption of your services?

I think you're seeing it. I mean if you think about it, every quarter mid-market/enterprise is representing a larger, larger portion of our revenues. So if you think about it last quarter, we were 43%, now we're at 45%. I mean steadily its moving in the right direction, I mean, I never like to predict massive acceleration, but I'm very pleased with the trajectory where more and more we're starting to see, not just mid-market, mid-market is pretty much saying, we're going cloud more often than not. When enterprise is also starting to say, we're going cloud, like its very interesting and I think that's what we built the company to do, and I think we're probably first in line, because we put the time and energy and bluntly the heartache and pain and suffering to really understand how to deploy these large global customers. And as I said, I don't want to declare victory, because it's always a journey, but its starting to feel better and better.

And Vik, last question from my side, I mean, certainly, understand your cautiousness on predicting, but if we look at the net income margins for this quarter, and we look at sort of your expectations for the full year, there does seem to be a little bit of a disconnect between the two. What type of traction would you expect to see ultimately whether or not those margins could prove to be conservative?

Mary Ellen?

Yes. Let me speak about that. Certainly, if you take out the one-time accelerated SoftBank we were at 8% versus 10%. So you see that we have already started to invest in some of the areas that we had said that we would invest in. What's key for us this year is to invest in enabling our channel, that's a big priority for us; ramping up our enterprise sales team, because as we had said we're seeing the increase in the pipeline; and then on Demand Gen as well, we want to make sure that we're achieving our goals by creating more leads and more opportunities. So we are investing, and we would expect that investment to continue. We're just at the early stages of that investment. Also, when you add in DXI our acquisition, we'll have a full quarter and our second fiscal quarter. They are not profitable yet. We expect them to be close to breakeven for the year, but there are some ramping that's going to happen before that happens. So in this particular fiscal quarter, there are some losses that we will incur with DXI. So we are sticking to our 6%. We believe that there is an opportunity out there for us. We didn't invest last year like we said we would, because we didn't see that opportunity, but this year we are seeing the opportunity and we don't want to miss out on that opportunity. So there will be some investments and that's why we are sticking to our 6% non-GAAP net income.

And our next question comes from George Sutton of Craig-Hallum.

Vik, when we talked with Geno at your Analyst Day, talked about a doubling of the number of qualified leads, and obviously you're building up a sales force to try to convert those two deals. I wondered if in the context of your MRR growth and that doubling of qualified leads, can we talk about win rate and any changes in deal cycles? And is there a point where we start to bring those two numbers together?

Fair enough. I mean, the good news is I think as Enzo mentioned, pipeline for us, and pipeline, we call it the QSQL, right, sales qualified lead that marketing sales, say the sales qualified. And then the second Q is that sales actually agrees with marking, and says that they qualified the sales qualified leads. That number is the most it's ever been. And I think you're seeing that reflected in MRR growth. This quarter new MRR was an absolute record. Last quarter it was also an absolute record. So little-by-little you're starting to see that translate into business. And as I said, for us, we feel pretty bullish about it. I think win rates, we like to feel particularly if it's international global-type customer. And particularly, if they are looking for an integrated solution, more often than not we win. And so we're pretty comfortable with where we are across the board. And I think we can give you guys a little more color at a later date.

You threw out an interesting statement relative to Australia and a couple of partners there. And I believe you mentioned APAC is the region that they would focus on. Could you go in a little more detail on that?

Yes. Actually a lot of our large customers have offices in Australia, and so they kind of pushed us in that direction. So it's started off with existing customer saying, we need capability in Australia. And then we started to get a bunch of new customers, and then a couple of partners came in that basically took our technology and are acting as resellers to the technology. And so we went live with that. We've gone through a training process with that, and we've already started deploying there. So again, we are doing this quite rapidly. And we are finding, again, the ability for a cloud-based company to deliver an integrated virtual office, virtual contact center, virtual meeting type solution. So essentially one-stop shop. But do it on a global basis with SLAs and industry-leading call quality is a huge differentiator. Increasingly, we are seeing a competition, as people like Avaya and Cisco and others, which is great. I mean that's if you want to play with the big boys, and I think we can win and we are starting to win against them, which is unique for cloud companies these days. And so we are staring to really feel pretty good about that.

And last, if I could, for Mary Ellen. The big ARPU increase that you saw this quarter, are you able to break that down a little bit in terms of, just if you let go a number of smaller customers or are you really seeing that significant increase in new customers?

One of the key drivers is on DXI. So DXI has a number of large customers. So they did bring significant increase to our ARPU.

So DXI was a key component?

Yes, that's a key. We are of course adding new customers and we are adding larger and larger customers, but for the most part this particular quarter DXI was the number one driver.

Our next question comes from the line of Michael Huang of Needham.

So Vik, just kind of around the enterprise opportunity out there, I mean it's great to see you guys pushing up markets and love hearing about the opportunity that you're seeing in the up to 10,000 seat range. I mean, could you remind us, again, like what is a largest customer by seat count that you have to gate? And maybe if you feel comfortable, like what was your largest deal in the quarter by seats? And is it fair to presume that you are actually seeing some opportunities right now that are kind of in that 5,000 to 10,000 seat range?

No, not initial. So if you look at my prepared remarks, I said that we saw a lot of 500 to 1,000 dollar seat that we won this quarter, with initial deployments 500 to 1,000 seats. We have got about 130 enterprise customers, right, but they're not full deployment. We are largest deployment is in the 2,000-ish seat range, so that starting to tell you how we are being pushed. Because, if you remember, in the last six to nine months is the first time we've got to that 1,000-ish seat range, we were never even close to that. And now, we are starting to talk about customers in the 5,000 and 10,000 seat ranges. Some of them are starting smaller and then trying to migrate, but we saw I think I remember saying of our top-five deals that were all in the 500 to 1,000 seat range. So we're starting to see more and more traction with the large of customers.

And I'm not sure if I missed this. But did you provide any color, kind of around the activity around analytics, the virtual office analytics? And it's a relatively new product cycle, but I was wondering if you can share kind of what you're seeing out there?

It's becoming increasingly a differentiator, particularly with the larger customers. So if you think about it, and I want to emphasize this part, because to some extend I have to pinch myself. I think because I was thinking back to the last year or so, and if you remember we used to talk about, well, we've been at the 20 to 50 seats, 50 seats essentially as defined as mid-market. And all by the way, we are trying to get up to 250 to 500 seats then we started to win a couple of 1,000 seat-type accounts. And suddenly 1,000 seat-type accounts are essentially our bread and butter and we're starting to really try and push forward towards 5,000 to 10,000 seat. I mean, again, I don't want to get ahead of the headlights, because we haven't won any 5,000 or 10,000 seat-type accounts yet, but the issue is, for the whole deployment, but the thing that is starting to become more and more interesting is, that's now a non-trivial portion of our pipeline. And so it's fascinating to me about how the market has started to tip towards cloud, because normally a 5,000 or 10,000 person company is not even going to talk cloud. They are all so focused on on-premise. And now they are coming to us, and talking cloud and we were literally not quite seeking them out. These are people that sought us out. With regard to your comment from a growth perspective, I think we talked about the mid-market and channel grew approximately 38% year-over-year and I think for new MRR. And so that is nice and steady and solid, and continuing to kind of go up-market there.

And are you able to share kind of your top-10 deals. I mean, how many of those actually included the analytics piece?

I think the majority of them have some form of analytics. I apologize, I made the statement that analytics has an increasingly unique differentiator, it's starting to almost become like table stakes. Because imagine a large distributed company, 38, maybe they are in 38 countries, maybe they are in 50 countries, they have 500 locations, 200 locations, 1,000 locations, 800 locations. Even IT person here, who is now deploying globally, every time he hears about a call quality issue, he's able to anticipate it and understand whether it was a network issue, a deployment issue, a user error or whatever. So that's increasingly what is enabling us to be able to win these larger opportunities.

Our next question comes from the line of Mike Crawford of B. Riley & Co.

Given that DXI came with some larger accounts, can you just remind us what the ARPU was that that brought in? And maybe relate that to the rate of increase you might expect of monthly ARPU for the remainder of the year?

Good question. So without DXI our ARPU was $326. So that's a $6 increase sequentially, $6 to $7 increase sequentially from our fourth quarter, and that's what we would expect going forward. DXI added the rest. So that's how we got from $326 to $353. So going forward from your modeling perspective, $6 to $7 in that range is the right number to use for an ARPU increase sequentially.

And then, regarding the pipeline of these 1,000 and 10,000-seat type accounts, where you're competing against the likes of Avaya and Cisco. Are you finding that these are enterprises that are looking to migrate from a PBX solution almost exclusively to then and going to the cloud and that's how you're getting in or is it even moved beyond that stage yet?

So they are typically moving from PBX solution to cloud. But the thing that is kind of interesting is several of these companies are cobbled together overtime. In other words, what is quite interesting is the larger the company, more often than not they are cobbled together, multiple companies through acquisitions. So you'll have three, four, five different PBXs, and they are now looking to go to one common way of communicating throughout the company. And so then this become their strategic initiative project, typically driven at a very high level of a company. So again, these are early days. So I don't want to declare a victory. But it is interesting, I think we talked about the number of $500 to $1,000 deals that we are starting to win this quarter. And I think we're starting to see that our pipeline for 1,000 to 10,000 deals is starting to grow. As I think I indicated also, we are starting to see quite a bit of traction in channels, and that's an area that we had not put much investment in over the years. But just in the last six months or so, as you know, six to nine months we've started to invest in channel, and that started to pop, where five out of our top-10 deals came from channel.

Now that you are interacting with these larger accounts, are you finding that your win rate changes in? Like in these trials, is there something where they're baking off and also trying some other systems or do you think they're exclusively looking to switch to you, at this point?

That's a great question, Mike. So this falls in the category and we are very cautious about these guys. Because again, they surprise us when we started to get bigger and bigger deals. So what our philosophy is we'll go through the first set of processes, which is all paper, et cetera. And typically when we get to the bake-off, when we get to a trial, typically they go with either one or two. And so more often than not, they only go with us. And we are pretty choosy, because we have walked away from several of these deals. If we feel like there is not a good fit for our technology or not a very high probability of winning, we tend to walk away. Because at the end I don't want to do a lot of these, what we call, whale-type deals. I only want to do a select few. And I want to make sure we pick the ones that we feel are very comfortable about doing, because then that proves the model and shows that we can continue to move up market in a very consistent way. So for us at least the ones that we take on, we expect to win, and when have a very high probability of winning. And the main reason is, because anyone that we think we don't have a good chance of winning, we don't take on, we kind of take our toys and go home.

Our next question comes from the line of Greg Burns with Sidoti & Company.

I was wondering if you could give us some color on the type of upsell you see from your customers over maybe some timeframe like one or two years after the initial deployment? What's the outside from that initial deployment, in terms of revenue, for you typically? And now, given that you're assigning these much larger customers, I assume the longer-term upside is fairly substantial over a couple of year's timeframe?

As you know, our mid-market customers grow quite rapidly. They're constantly acquiring other companies. So we grow with them. We have a number of examples of customers that have started out small and has now are in our top 20, top 30 customers. So I wouldn't say most, but between 45% and 50% of our new MRR's coming from existing customers. If we continue to provide them a high-quality product, they're going to continue to buy from us, and so that's why we love the mid-market is because it gives us that nice lifetime value because of the growth associated with these customers. A, they stick with us for a very long time, because of the backend integration; and two, as they grow, and we grow with them.

These larger-type enterprise deals, do they require like dedicated service or are they okay going over the public internet? Do you find that they are requiring a higher level of service than the SMB customers?

So this is where our performance SLA, so I'd like to think that we have been smart about how we've been going about it. So we were a company as you know two, three years ago. We were primarily SMB. Then we moved up into mid-market and candidly bread-and-butter is mid-market. So that's increasingly you're seeing that's our core, that's the one that's going 38%-ish year-over-year, that represents as I indicated about 45% of our revenue today. Now, we're starting to see enterprise move, but they are early. I mean, in another words its still early days for enterprise. From our perspective, what we did is all the -- so we basically learned from mid-market customers, because that transition from SMB to mid-market was pretty painful. And we went through that over the last two years or so. The transition to enterprise I'm sure will come with its share of challenges, but the good news is all those things that we have been announcing in the structured and step-by-step way, elite touch, the first company to be willing to offer performance SLAs over the public internet. The ability to work with both MPLS and public internet, and we get customers of choice; if you want MPLS, great, but we still suggest you have backup up the public internet, and that's because MPLS lines some times get cut. And so then you want the ability to go on the public internet and/or you can go just in the public internet. Some of our customers go with the dual MPLS public internet strategy and some customers are going straight with a pure public internet strategy. And the key is we have learned, because we've now got a very significant junk of mid-market customers that we've kind of really learned how to ensure that we provide the kind of service level that they expect for a mission-critical system. Enterprise is probably a jump up, but it's not as dramatic a jump as the jump it was from SMB to mid-market.

I'm showing no further questions at this time. I'd like to hand the call back over to Vikram Verma for any closing remarks. End of Q&A

All right, so in closing, I'd like to thank all of you who attended our first Analyst Day last month, either in person or via webcast. And to remind you that in August, we will be presenting at the Needham Conference in New York and the Oppenheimer and Canaccord Genuity Conference in Boston, and we look forward to meeting with you at one of these events. Thank you, again, and have a good day.

Ladies and gentlemen, thank you for participating in today's conference. That does conclude today's program. You may all disconnect.